The 1987 crash.

John Maynard Keynes . . . discredited monetary policy as an instrument of economic control. . . Under Keynesian theory, fiscal policy – variation in the rates of government taxation and spending – became the key tool for maintaining economic stability.

. . . Government was thus granted an essential role in the economic well-being of a capitalist economy. By giving it that status Keynes contradicted another old idea of western economies – that the privately-owned industries of an economy, operating in a free market situation, will call out the full employment of resources in an economy. Adam Smith, the 18th century economist, first enunciated the principle in his book “The Wealth of Nations.”

. . . These old ideas have been invested with a new power by the apparent failure of Keynesian policies. The economic problem now is of a new type – high inflation accompanied by low, or even as in New Zealand’s case, negative growth, and an unemployment problem of a size not seen since the Depression.

. . . Friedman’s ideas are wonderfully simple . . . “I believe the Government has a few essential functions. . . defence . . . law and order . . . defining property rights . . . At what level should government spending be held? . . . If you look at the ancient tradition of religion, the tithe – one tenth of your income – is very regular. . . Britain . . . government spending as a fraction of income in the early 1800s was 25 percent. By the time of Queen Victoria’s jubilee at the end of the century, when Britain was at the height of its power, government spending was 10 per cent of the national income. . .”

Friedman works off the premise that government services cost roughly twice their private-enterprise equivalent.

. . . Opposed to the Friedman philosophy in America is the liberal economist J.K. Galbraith, who believes no major market has the capacity now to behave according to the Friedman prescription. Galbraith, after Keynes, claims prices and wages are always . . . negotiated from positions of power by big corporations and big unions, and government’s role is to regulate such markets in accordance with the interests of the people. Galbraith also defends the government’s right to maintain standards for its citizens and the right to tax to achieve these objectives.

. . . Friedman talks like a man who senses that he has the opposition on the back foot. . . “There is a world-wide move against the failures of government to achieve their noble objectives. Instead they are saddling people everywhere with inflation on the one hand, and slow growth on the other. Slow growth and high taxes, so you’re getting a world-wide tax revolt . . . And the welfare state? I think it’s a dying animal. I think sentiment has turned against it.”

2. NZ Herald, 11 February 1987.

The secular high priest of American management, Professor Peter Drucker . . . estimates that financial transactions produce an annual global turnover in excess of $US100,000 billion now, while trade in goods and services has grown to only $US3000 billion a year.

A collapse of most raw commodity prices since 1977 is, he believes, irreversible. The most strenuous efforts to open food markets and remove subsidised over-production will count for little, it seems, when advances in agricultural technology promise that world supply will continue to outpace growth in demand. The outlook for non-food raw materials is just as bleak. In the age of the microprocessor, raw materials provide a much smaller proportion of production factors than they do in traditional heavy manufacturing.

The same changes in the manufacturing landscape have stunted demand for blue-collar employment. . . . All those developments are, in the Drucker analysis, permanent, not cyclical.

3. The Australian High Commissioner to New Zealand, Sunday Star, 22 March 1987.

The floating of the exchange rate and abolition of exchange controls has facilitated complete integration of the Australian economy in the global trading and financial system.

There have been other important moves towards financial deregulation. . . All bank interest controls and all limitations on the types of deposits which can be accepted by banks have been removed and fixed commissions on security dealings abolished.

As a result of these reforms, mature and sophisticated financial markets have been able to develop and more effectively marshal the financial reserves necessary for investment and development.

A matter of interest for New Zealand concerns the liberalisation of Australia’s foreign investment guidelines.

The new policy provides that proposed new investments and acquisitions of businesses in the manufacturing, non-banking finance and tourism sectors are now approved virtually automatically.

. . . The Australian Government encourages private industry to become more robust and internationally competitive and less reliant on Government assistance and intervention.

Substantial strides have been made in clearing away burdensome regulations to encourage development.

4. Simon Collins, NZ Herald, 9 May 1987.

Mr. Wellington stunned his party’s leaders by accusing them of being subservient to big business and forgetting the interests of “the small man.”

But the lack of support for his views . . . revealed that . . . “interventionism” has lost the battle in the party caucus room.

The official finance spokesman, the Hon George Gair, is blunt.

“We are not going back to the controls of the past, ” he says.

In essence, National is now presenting itself as an alternative free-market party, based on the same principles . . . but taking them further into areas such as social spending and union affairs where Labour must tread more warily.

The major difference between itself and Labour, in National’s view, is that it would manage the change to a free-market economy better.

It would place the interest of “the productive sector” first. That means that it would not tolerate an exchange rate or interest rates as high as current levels.

. . . Mr Douglas and his team have convinced much of the country that any policy committed to lower interest and exchange rates is a fundamental breach of the free-market doctrine.

. . . In Mr. Gair’s view, Mr Douglas has made the mistake of letting interest rates rise too high in order to squeeze consumer spending – at the cost of making New Zealand industry uncompetitive.

National thinks it can get both interest and exchange rates down by its planned reduction of social spending, by the revenue it will earn from privatisation, and by the increased productivity it expects to flow from union reform and more generous depreciation allowances.

. . . Mr Wellington believes that the state should intervene to help disadvantaged groups, to uphold moral standards, and to secure the national interest . . .

His views are out of favour at a time when both major parties are riding an international wave of reaction against the costs and controls of the welfare state and the protected economy.

5. Economist Service, NZ Herald, 15 June 1987.

Mrs. Thatcher . . . has composed a cabinet largely in her own image . . . The men she likes tend to be south-of-England, urban, first-generation university, self-made . . .

She was lucky to win her first election, in 1979, on a crescendo of popular revulsion against the anarchic behaviour of trade unions, especially those in the public sector.

She had the good fortune to inherit a rapidly rising flow of North Sea oil, which . . . filled the Treasury coffers.

. . . Above all, she has been lucky in her opposition, split between the Labour Party and the SDP-Liberal Alliance, so that her “landslide” victory of 1983 was won with the smallest share of the popular vote of any post-war Tory government.

. . . She has exceptional stamina . . . She may devote more attention to foreign policy . . . At home her goal is to continue to uproot socialism . . . she finds it hard to . . . believe that there are people whose lot cannot be improved simply by changing the system to allow them to become sturdily independent.

6. John Pilger, The Guardian, 22 July 1987.

Many Australians voted for Mr Hawke because there was no one else : the opposition was deeply divided and its arguments either incoherent or reflecting extreme right-wing positions, caused by Mr Hawke’s theft of their more orthodox conservative clothes.

The truth is that the Hawke government’s policies are at least as much to blame for Australia’s economic difficulties as any external pressures.

As world agricultural markets contracted and commodity prices fell, the treasurer, Paul Keating, imposed monetarist policies on an already fragile economy. Protection was abandoned almost overnight, much of industry was deregulated, and the Australian dollar floated in a highly unstable speculators market. The result has been some of the highest, most damaging interest rates in the world, and a deeply wounded currency. . . a millionaire huckster class which never existed in Australia, has risen to considerable power.

7. NZ Herald, 17 August 1987.

Inflation remains the prime target of the Minister of Finance, Mr Douglas, in Labour’s second term.

But he has no plans to adopt new instruments of monetary restraint in response to the latest jump in the consumers price index revealed just before the election campaign.

Speaking after the Government’s re-election at the weekend, Mr Douglas said he still believed present monetary control was “about right.”

The new Administration would have to ensure that Government spending remained under restraint, he said.

. . . Mr Douglas reaffirmed his opposition to a capital gains tax despite the fact that at least one business audience during the campaign raised a request for some discouragement of speculative investment.

The minister said he believed reductions in company and other tax rates were “the better way to get people investing for productive purpose.”

He believed, in any case, that investment was beginning to flow into productive areas.

8. Bill Hodge, Sunday Star, 23 August 1987.

Labour must enhance its revenue in the second term. . . We have been told repeatedly this term will be devoted to social justice and caring. . . On its present income levels, the Government cannot hold fast simultaneously to both the old party idols and the new market economics.

. . . A contrast with the United States experience may help. In that jurisdiction, a comfortable political roundalay alternated predictable party behaviour. The Democrats, considered to be compassionate money spenders, would devise new deals, new frontiers, new societies or new whatevers as a vehicle for federal intervention in local problem-solving. After a term of red ink, the fiscally responsible, but less caring, Republicans would come in, stop throwing money at poverty, balance the books and create enough resentment that the pendulum would swing back. Then the Democrats would come back, and the cycle would commence again.

President Reagan has broken that cycle by, in one stroke, seizing the worst aspects of each style of government. On one hand, he has chopped and pruned federal spending on health, education and housing, and has taken the Government out of the welfare business. On the other hand, he is the most profligate deficit spender in US history. Taxes have been cut, the consolidated fund has been shifted to the Pentagon, America’s internal debts have hit two trillion, and it now has the world’s largest offshore deficit.

9. NZ Herald, 21 October 1987.

Stock prices around the world plummeted on Monday, taking their cue from the downward spiral on Wall St., which suffered a decline unprecedented in modern times.

. . . The Dow Jones average of 30 industrial stocks . . . has now lost half the ground it has gained over five and a half years. . . The one-day decline of 22.62 per cent easily exceeded the 12.82 per cent on October 28, 1929 at the onset of the Great Depression of the 1930s.

Shares opened the trading day in the Far East with a nosedive, with investor confidence shaken after a record single-day decline on Wall St. on Friday.

. . . Prices plunged on the London Stock Exchange . . . London market indexes were not computed on Friday because trading was suspended following a hurricane early on Friday morning.

. . . Brokers attributed London’s massive decline to “herd instinct” and said it was exacerbated by the electronic price systems that the London Stock Exchange has used in the year since “Big Bang,” the sweeping liberalisation of the British financial markets.

. . . The stock exchange in Frankfurt had to extend trading by 30 minutes because of heavy volume.

“I have been on the bourse 30 years, through the Cuban missile crisis and revaluations [of the West German mark], but I have never seen anything like this,” a broker at a major bank said.

10. Simon Collins, NZ Herald, 24 October 1987.

For a moment, after sharemarkets crashed around the world on Tuesday, it seemed as though the terms of economic debate would be turned upside down.

. . . In the United States, the Federal Reserve Board chairman, Dr Alan Greenspan, announced that the board was standing by ready to pump money into the American economy if the Wall St crash spread into a general financial collapse.

. . . In New Zealand Dr Gareth Morgan . . . suggested that the Government might have to rethink the high priority it had given to bringing down inflation . . . a recession was likely to resurrect Keynesian policies aimed at stimulating the economy by cutting taxes, boosting Government spending, or pushing down interest rates by pumping more money into the system.

. . . If there was ever a time when Mr. Douglas might have buckled, this was it.

But he did not. The pressure from economists was rejected, and the anti-inflationary policy reasserted, in a statement from the Reserve Bank. The brief moment when change seemed possible passed.

. . . On Wednesday, as world sharemarkets steadied after Tuesday’s plunge, even the economists who are most worried about the effects of high interest rates on the productive sector were resigned to stick with the policy a while yet.

. . . Similarly, even the most leftist Labour MPs explained their silence about wholesale post office closures on the basis that the broad “free market” policy was now set, and had to run its course.

11. J.K. Galbraith, Dominion Sunday Times, 1 November 1987.

. . . We have had the mergers and acquisitions mania. And we have had the young generation of investment operators, most of them in the big investment houses, who persuaded many vulnerable minds that they were bringing a new genius to Wall St. Nobody believed it quite so strongly as those young people themselves. As in October 1929, so in October 1987, we have discovered how people were captured by the mythology of the market.

. . . For the disasters of these past weeks we must hold the Reagan administration substantially responsible.

Two great innovations carry a large share of the blame. There was first the extraordinary notion that, by large reductions in taxes, one could have large increases in income. This produced an unparalleled deficit in the public budget and lodged a great deal of speculative money in the hands of people who put it into the market.

The second great contribution of the Reagan administration to the crash was its experiment with monetarism . . . The resort to monetarism in the early 1980s brought very high interest rates, a very high dollar on exchange markets and subsidised imports from Japan, Korea and other countries. The result has been the continuing high trade deficit.

. . . But I don’t think we will see anything quite as damaging as there was after 1929.

In all of the world economies, including the US, there is now a responsibility on the part of the state to sustain the level of employment and the level of production and economic growth. Additionally, in the modern welfare state a good many safeguards have been built into the system.

There have been some people associated with both the government of the US and that of Britain who have wanted, in the name of the free market, to get rid of this supporting structure. I think we were fortunate that they were not successful.

. . . We have had an irresponsible Keynesianism in these past years from the Reagan administration which has undermined local and world confidence. I’m not being ironic. Keynes, from wherever he is watching, must have been marvelling at what the Reagan administration was doing in his name.

We must close the Budget deficit.

. . . People say that the computerisation of the markets had a hand in what has happened. I don’t agree.

. . . I have also repeatedly been asked what is the effect of the changes that have occurred in the leadership of the American Central Bank, the Federal Reserve. Absolutely nothing . . . central bankers respond to the pressures to which they are subject and are instruments of the bureaucracy which they lead.

My guess is that we have now written the last chapter on Reagan economics . . .

12. Alexander Fry, NZ Listener, 7 November 1987.

. . . It is worth remembering what happened in the early years of America’s New Deal, when Roosevelt tried to revive the Depression economy by pumping public money into it. In theory people would spend the money, thus creating demand, employment, and so on. In practice the money disappeared, presumably into stockings tucked under mattresses. People were too pessimistic about the future to part with a little security.

Optimism works in the exact reverse, with money pouring into investment well past the point where such investment is justified by the facts. This reaches its apogee, of course, in just such bullish markets as those which recently prevailed . . .

Where America goes, of course, the rest of the capitalist world follows. Especially New Zealand. Whatever talents our nation may lack, we are not short of trend-sniffers with keyboards. As a result our own sharemarket dived with Wall Street in the kind of unison a young whale exhibits when sounding with its mother.

. . . A danger is that the present sharemarket decline coincides with some concern about the economy itself. Up to now, many of those hurt by the “more-market” policies have been buoyed by a confidence that the Government was turning the economy around and that the future would be better. Businessmen, some farmers, and most professional economists appeared to share that view.

. . . It should rapidly become clear that the main sufferers are speculators . . . Serious investors whose interest is in financing a good idea for reasonable return will simply sit on their shares and hope that – this time – the mania in the sharemarket will not infect business itself.

13. Some welfare history. Alison Marshall, December 1987.

It is likely that the world economy at present is near the most depressed point of a long-term Kondratieff cycle. . . According to the U.S. Development Council this year, “some experts believe the economic climate is about to turn propitious for welfare reform. The competition for jobs that resulted when the baby boom generation reached working age is a thing of the past. In the 1990s fewer people – those born during the baby bust, the period of low birth rates that began in 1965 – will be looking for jobs.” (Time, 16 February 1987.)

. . . Historian David Thomson of Massey University finds that the “welfare generation”, born between 1920 and 1950, have failed to pass on the benefits of the welfare state to their children (“Bidding Farewell To The Welfare State”, Dominion Sunday Times, 1 November 1987.) Housing assistance, employment and wages, family benefits and tax rebates are all less generously available for young people today than they were 25 years ago. . . There have been cyclical oscillations between collective or individual responsibility in the welfare practices of European societies, rather than steady progress towards the welfare state (“A Question of Responsibility – Rewriting the History of Social Welfare”, Dr. David Thomson, Replay Radio, Wellington, November 1987.)

14. Brian Easton, NZ Listener, 12 December 1987.

The seeds of the Great Depression may be found in the consequences of the First World War. War debt and reparations had dramatically changed the patterns of the world’s creditor and debtor nations. . . By the early 1930s, the international monetary system was in no condition to face recessions which were occurring simultaneously in different places. Each country took separate measures, such as increasing border protection . . . The collective outcome was the contraction of the world economy, with each country’s defensive actions worsening the situation.

In such circumstances one might expect the Banker of the World to step in and supply the liquidity and expansion which was needed. But Britain no longer had the financial strength, and the long series of still unsettled recriminations left little chance of a co-operative solution from the world’s financiers.

. . . The United States was eventually to take over Britain’s role of Banker of the World. But at that time, beset with domestic problems, it was hesitant to take up leadership, and inappropriate economic theories were in place. Even as he left office, Herbert Hoover advised his successor that the budget should be balanced and “there should be no tampering with the currency”.

. . . Today there are uncomfortable parallels. The oil shocks have left a legacy of debt and disorganisation. And Reaganomics, fighting a phony war with the Soviet Union, has turned the world’s largest creditor nation into the world’s largest debtor nation in a matter of three years.

Of course the United States has to do something about its government deficit, financed by foreign borrowing . . . But if they contract their economy, there is a need for a compensating expansion elsewhere in order to avoid the sort of worldwide contraction that occurred in the 1930s.

. . . Japan and West Germany have resisted additional expansion because of worries about the inflationary impact of the American deficit . . . The optimistic scenario is that the world has learnt some lessons from the past. There are calls for co-ordinated policies between the major economic powers.

15. Michael Carter, NZ Listener, 23 January 1988.

. . . The New Zealand dollar . . . has appreciated against the US dollar. But the United States accounts for only 15 percent of our trade. Since floating, the New Zealand dollar has depreciated significantly against other major currencies such as the German mark and the Japanese yen. . . Combining all the currencies with which New Zealand trades, the New Zealand dollar is today worth almost exactly what it was in March, 1985.